Auto-enrolment has been a success so far but faces major challenges over the coming months. Helen Morrissey talks to pensions minister Baroness Ros Altmann on how to keep the project on track.
- DWP is simplifying the auto-enrolment process for small and micro employers
- Industry should do more to highlight benefits of pension saving
- Increased provisions allowing people to access guidance/advice through the workplace will boost engagement
Pensions minister Baroness Ros Altmann has had a lot to contend with in recent months. High profile spats with former boss Iain Duncan Smith and lobby group Women Against State Pension Inequality (WASPI) aside, there are concerns that auto-enrolment (AE) could be undermined by the introduction of the lifetime ISA in the recent Budget. In addition AE faces its sternest test to date as it prepares to welcome small and micro employers, who may not even be aware of their responsibilities, to the fold.
However, Altmann remains resolutely cheerful and determined that the success of AE be maintained as it rolls out to smaller employers.
"So far it looks like many employers have already risen to the challenge of AE," she says. "Compliance levels are high and opt-out levels are low and we haven't heard of any schemes falling over. There have of course been the occasional administration issues but that is to be expected with such a project. Even re-enrolment appears to have gone well so far.
"I never want to tempt fate but I think so far we can classify AE as a success. However, we have just done the easy bits in that we have dealt with the big employers who by and large have had the resource to deal with this – the real test is yet to come. Since 2012 we have seen just over 100,000 schemes set up but over the next two years we will see another 1.7m go through the process. However, providers have expected these volumes and have been well set up to deal with them so far."
Workie to the rescue
The challenge of seeing smaller employers through AE is not just one of volume. Many micro employers -those employing a nanny or a gardener for instance -do not even see themselves as an employer and so do not realise they have an AE obligation.
According to Altmann the changing audience demanded a different approach. In October 2015 the Department for Work and Pensions (DWP) unveiled Workie -a large multi-coloured creature charged with making these micro employers aware of their obligations. The use of Workie has divided the industry but Altmann insists the campaign has been a success.
"The whole issue behind the Workie campaign was that it needed to catch the attention so these small business owners know what they should be doing about AE," she says. "In the TV advert we looked at nannies in particular because how many working mums actually know they have to do this? Some of these people don't even know that they are employers.
"If you are a young person who has just started their own business and is looking to hire their first employee – they need to know about the fact they should supply a pension to their staff and this is where the new campaign is focused. It has worked well so far.
"Workie might have been a bit of a shock at first but that is why it has been so successful. We have done research that shows that when people see Workie they immediately think of pensions and that is a great result. We have also seen increased traffic to The Pension Regulator's website."
However, once these people have been made aware of their obligations under AE what then? These employers will not have the resource to employ a consultant so Altmann is looking to simplify the procedure to give them as much support as possible.
"With AE now we are dealing with individual people who are running a business themselves," she says. "We need to simplify the process and offer more handholding to these people. We have already streamlined the process from 12 steps to five and we want to ensure they can do this process without having to go to advisers if that is what they want to do. You shouldn't have to pay a few hundred pounds to set up a scheme for a few low earning members of staff – this needs to be doable."
She added: "It's all about establishing a new norm and if you are an employer in the UK then you know you are responsible for employee's tax, national insurance and their pension. You can't just talk about it now – you have to do it."
While AE has been a great success so far minimum contributions remain low - something Altmann admits will have to change.
"It is a great start but it is only the start," she says. "Contribution levels are very low and if people want a decent pension then they will have to save more. However, by 2019 minimum contributions will have quadrupled. We have timed the contribution increases to tie in with the start of the tax year so it will hit people less. We will see opt-outs but no one could have predicted the low level of opt-outs that we have seen so far. With larger employers this might be partially to do with the positive messages being put out by HR departments but will smaller employers be able to do this? It won't surprise anyone if we see opt-outs go up but we need to be able to manage them."
Another potential challenge to the progress of AE is the introduction of the lifetime ISA (LISA). Announced in the recent Budget the LISA will be available to adults under 40 from April 2017 to save for retirement or to buy a house. People will be able to save up to £4,000 per year and the government will add a bonus of £1 for every £4 saved.
The introduction led to concerns that younger people may choose to opt out of AE to save into a LISA. Altmann recognises the concern but says it can be mitigated by increased awareness of the benefits of pension savings.
"I was delighted to see that the chancellor didn't make any radical changes to the pension product that might have undermined AE. LISA is an interesting addition to the opportunity set but I don't want it to take away from the pension," she says. "Of course one of the major benefits of the pension is the employer contribution and people need to understand just how powerful this can be."
So how can this be done? In the face of competition from LISA should the industry be doing more to promote the benefits of saving into a pension?
"I would absolutely love it if the industry campaigned on the benefits of pension saving," says Altmann. "We should be shouting from the rooftops about what a great savings product it is. The industry needs to play its part in reaching out to ordinary savers. AE has brought providers into contact with millions of new savers and they should help this new audience to understand. I want to see more talk of how good pensions can be – they are so valuable and people will miss them if they don't have them."
If people understand more about the benefits of pensions then engagement with them should hopefully increase. With this in mind Altmann is supportive of the provisions made in the Budget to increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500. In addition Budget documents also announced a consultation on introducing a Pension Advice Allowance enabling members to withdraw money tax free from defined contribution pensions to fund financial advice
"We need to ensure the guidance and advice is there for people and while £150 won't get you anything £500 will," says Altmann. "I think it is a sensible move and both measures are the start of something powerful in terms of helping people plan for the long term. The money they save needs to see them through into their 80s and 90s and they have to understand that they have to make it last. We could see the development of fixed price packages that cover different things - this would really help increase engagement."
She continues: "We have started off with inertia but we do want them to engage. They need to look at what they have saved and ask themselves how much will that give me? Is that enough? If people checked every year and asked themselves these questions they would have more opportunities. Obviously people have competing demands on their money but if you have employers offering a good deal then we will get more engagement with pensions."
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